VIVA

Basic Accounting
 Accounting: is an information system that identifies, records, communicates the economic
events of an organization to interested its users.
 Internal Users: Internal Users of accounting information are those individuals inside a
company who plan, organize, and run the business. 1) Marketing Managers 2) Production
Supervisors 3) Finance Directors 4) Company Officer.
 External Users: External Users of accounting information are those individuals outside a
company who wants financial information about the company. 1) Investors 2) Creditors 3)
Creditors 4) Taxing Authority 5) Regulatory Agencies.
 Objectives of Accounting: The objectives of accounting are- 1) permanent record of
transaction, 2) finding operating result, 3) determining financial position, 4) cost control,
5) control over the assets and liabilities, 6) prevention of errors and fraud, 7) supply of
information in taking business decision.
 Major Branches of Accounting: 1) Financial Accounting 2) Cost Accounting 3) Management
Accounting.
 There are two functions in Accounting. 1) Stewardship function, 2) Managerial function.
 Steps in accounting process are-1) identification 2) Recording 3) Communication.
 Accounting Equation: Accounting equation is the relationship between asset, liability and
owner’s equity of a business. It is the foundation for the double entry bookkeeping systems.
Here, Asset = liability + owner’s equity.
 Accounting is called the language of business because, all business information supplied by
the accounts of the business.
 Accounting assist/aids management by planning, organizing, directing, motivating,
coordinating, controlling, preparing final accounts, creating media of communication,
budgeting and providing consulting service.
 Book-Keeping: A part of accounting that involves only the recording of economic events.
Main function of the book-keeping is to record financial transaction.
 Asset: Assets are resources owned by individuals, business and government. Asset is anything
of value that can be converted into cash.

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 Current Assets: Assets that a company expects to convert to cash or use up within one year.
 Intangible Assets: Noncurrent assets that do not have any physical substance.
 Liabilities: Liabilities is a creditor claim on total assets.
 Current Liabilities: Obligations that a company expects to pay form existing current assets
within the coming year.
 Long term Liabilities: Obligations that a company expects to pay after one year.
 Liquidity: The ability of a company to pay obligations expected to be due within the next year.
 Owner’s Equity: Owner’s Equity is the ownership climes on total assets.
 Transactions: The economic events of a business that are recorded by accountants.
 Revenue: The gross increase in the owners’ equity resulting from the business activities for the
purpose of earning income.
 Accrued Revenue: Revenue earned but not yet received in cash or recorded.
 Expense: The cost of assets consumed or service used in the process of earning revenue.
 Unearned Revenue: Cash received and recorded as liabilities before revenue is earned.
 Accrued Expense: Expense incurred but not yet paid in cash or recorded.
 Prepaid Expense: Expense paid in cash that benefit more than one accounting period and that
are recorded as assets.
 Operating Expense: Expense incurred in the process of earning sales revenue.
 Cost: Cost is the value of money that has been used up to produce something.
 Drawings: Withdrawal of cash or other assets form the business for the personal use of the
owners.
 Net Income: the amount by which revenue exceeds expenses.
 Net Loss: The amount by which expenses exceeds revenue.
 Financial Accounting: The fields of Accounting that’s provides the economic and financial
information for investor, creditors and other external users.
 Balance sheet: A financial statement that reports the assets, liabilities and owner’s equity at a
specific date.
 Classified Balance sheet: A balance sheet that contains standard classification or section.
 Income Statement: A financial statement that present the revenue and expenditures and
resulting net income or net loss of a company for a specific period of time.

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 Owner’s Equity Statement: A financial statement that summarizes the changes in owner’s
equity for a specific period of time.
 Statement of Cash follows: A financial statement that summarizes information about the cash
inflows (receipts) and cash outflows (Payment) for a specific period of time.
 GAAP: The Accounting profession has developed standards that are generally accepted and
universally practiced. This common set of standards is called generally accepted accounting
principal (GAAP). These standards indicate how to report economic events.
 FASB: FASB stands for Financial Accounting Standards Board. It is a private organization
establishes generally accepted accounting principal (GAAP). Established in1973.
 IASB: IASB stands for International Accounting Standards Board. An accounting standard-
setting body that issue standards adopted by many countries outside of the United States.
Established in 2001.
 Economic entity Assumption: An assumption that requires that the activities of the entity be
kept separate and distinct from the activities of its owners and all other economic entities.
 Monetary unite Assumption: An assumption stating that companies include in the accounting
records only transition data that can be expressed in terms of money.
 Sole proprietorship: A business owned by one person.
 Partnership: A business owned by two or more person associated as partners.
 Fiscal Year: An accounting period that is one year in length.
 Calendar year: An accounting period that extend from January 01 to December 31.
 Public Accounting: An area of accounting which the accountant offers expert service to the
general public.
 Private Accounting: An area of accounting within a company that involves such activities as
cost accounting, budgeting, design and support of accounting information systems and tax
planning and preparation.
 Credit: The right sight of an account.
 Debit: The left sight of an account.
 Double entry System: A system that records in appropriate accounts the dual effect of each
transaction.

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 Journal: An accounting record in which transaction are initially recorded in chronological
order.
 Ledger: The entire group of accounts maintain by a company.
 Posting: The procedure of transferring journal entries to the ledger account.
 Ledger is called king of all books because, all the objectives of the accounting are achieved
through ledger and all the required information regarding business is acquired from ledger.
 Ledger plays an immense role in preparing Balance Sheet. With the help of the balance of
assets, liabilities account Balance Sheet is prepared.
 Cash Book: Cash book is a record of all the transactions related to cash. Examples include:
expenses paid in cash, revenue collected in cash.
 Petty Cash Book: The cash book in which the amount of petty cash receipts from the chief
cashier and details of petty cash payments made by the petty cashier are recorded is called
Petty Cash Book.
 Trial balance: Trial balance is a summary of all the debit and credit balances of ledger
accounts. The total of debit side and credit side of trial balance should be matched. Trial
balance is prepared on the last day of the accounting cycle.
 Adjusted entries: Entries made at the end of an accounting period to ensure that companies
follow the revenue reorganization and matching principles.
 Adjusted Trail Balance: A list of account and their Balances after the company has made all
adjustment.
 Correcting entries: Entries to correct errors made in recording transaction.
 Closing Entries: Entries made at the end of the accounting period to transfer the balances of
temporary accounts to a permanent owner’s equity account.
 Reversing Entry: At entry made at the beginning of the next accounting period, which is exact
opposite of the adjusted entry made in the previous period.
 Post-Closing Trail Balance: A list if permanent accounts and their balance after a company
has journalized and posted closing entries.
 Income Summary: A temporary account used in closing revenue and expense accounts.
 Ethics: The standard of conduct by which one’s action are judge as right or wrong, honest or
dishonest, fair or not fair.

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 Invoice/ Chalan: An invoice is a documentary evidence of purchase or sales.
 Bill and Cash Memo: The seller prepares a cash memo for cash sale and hands its over to the
buyer. Cash memo are generally prepared in triplicate forms.
 Voucher: Vouchers are the documentary evidences of transaction. Such as- cash sales, cash
purchase expenditure and income etc.
 Debit Voucher: Voucher used for purchase and various expenses are called the debit voucher.
 Credit Voucher: Voucher used for sales and various incomes are called the debit voucher
 Debit Note: The letter which is used for returning goods is called a debit note. Generally debit
note is written in red ink to differentiate it from Chalan.
 Credit Note: when the seller return of goods, he send a letter stating therein quantity of goods
rate, price to the purchaser information him that his account is credited for his return. This
letter is called credit note.
 Account: A record of increases and decreases in specific asset, liability and owner equity
items.
 Classification of Account: 1) Golden Classification (Traditional)
I) Personal Account
1. Debtors Account.
2. Creditors Account.

II) Impersonal Account

1. Real Account
2. Nominal Account
2) Modern Classification (Education).
1. Assets Account
2. Liability Account
3. Expenditure Account
4. Income Account

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 Rules for determine Debit and Credit:
I) Golden Rules

II) Equation Method or Modern Method:

1. Assets= Liability + Owner’s Equity
Or Assets= Liabilities + Capita + Revenues – Expenses – Drawings.
Under this method the determining rules for debit and credit are as follows:
1. Assets increase is – Debit
Assets decrease is – Credit
2. Expense increase is – Debit
Expense decrease is – Credit
3. Liabilities increase is – Credit
Liabilities decrease is – Debit
4. Capital increase is – Credit
Capital decrease is – Debit
5. Drawings increase is – Debit.
Drawings decrease is – Credit.
 Operating Cycle: The average time that it takes to go from cash to cash in producing revenue.
 Accounting Cycle: The sequence of accounting procedures, used to record, classify and
summarize accounting information is called accounting cycle.

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 1) Identification of transaction 2) Journalizing 3) Posting to the Ledger Account 4)
Preparation of Trail Balance 5) Adjusting Entries 6) Adjusted Trail Balance 7) Preparation
of Financial statement 8) closing Entries 9) Post Closing Trail Balance 10) Reversing
Entries.
 Worksheet: A work sheet is a multiple column form used in the adjustment process and in
preparing financial statements. It is not a permanent accounting record. The use of worksheet is
optional.
 The steps of worksheet are 1) Trial balance 2) Adjustment 3) Adjusted Trail Balance 4) Income
Statement 5) Balance Sheet.
 Accrual Basis Accounting: Accounting Basis in which companies record transactions that
change a company’s financial statements in the periods in which the events occur.
 Cash Basis Accounting: Accounting Basis in which companies record revenue when they
receive cash an expense when they pay cash.
 Cost of goods sold: the total cost of merchandise sold during the period.
 Gross profit: The excess of net Sales over the cost of goods sold.
 Net sales: sales less sales returns and allowances and sales discounts.
 Sales revenue: The primary source of revenue in a merchandising company.
 Periodic Inventory System: A periodic inventory system is an accounting method in which
the updates are made on cost of goods sold is a periodic basis.
 Perpetual Inventory System: A perpetual inventory system is an accounting method in which
the updates are made on cost of goods sold is a continuous basis.
 Inventory turnover: A ratio that measure the number of times on average the inventory sold
during the period. (Dividing the cost of goods sold by the average inventory during the period).
 Raw materials: Basic goods that will be used in production but have not yet been placed into
production.
 Bank reconciliation: The process of compering the bank’s balance of an account with the
company’s balance and explaining any differences to make them agree.
 Deposits in transit: Deposit recorded by the depositor but not yet been recorded by the bank.
 Outstanding Check: Checks issued and recorded by a company but not yet paid by the bank.

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 NSF Check: A check that is not paid by a bank because of insufficient funds in the customer’s
bank account.
 Account Receivable: Amounts owned by customers on account.
 Note Receivable: Claims for which formal instruments of credit are issued as proof of the
debt.
 Bad debts expense: An expense amount to record uncollectible receivables.
 Promissory note: A written promise to pay a specified amount of money on demand or at a
definite time.
 Depreciation: The allocation of the cost of an asset to expense over its useful life in a rational
and systematic manner. Need to Account for Depreciation: 1) To ascertain the true profit
during a year 2) To ascertain the true value of assets 3) Depreciation allows taking the
advantage of tax benefit.
 Method of Depreciation: 1) Straight Line Method 2) Diminishing balance Method 3) Annuity
 Straight Line Method: The method by which the same rate or amount are always charged
against the assets is called Straight Line Method.
 Diminishing Balance Method: The method by which the amount of depreciation is to be
calculated on the assets after deduction of depreciation of previous accounting periods is called
Diminishing balance method.
 Annuity Method: The method by which equal amount of depreciation is to be charged on cost
of an asset with interest thereon in each accounting period is called Annuity method.
 Depreciable Cost: The cost of a plant asset less its salvage value.
 Book Value: The difference between the cost of depreciable asset and its related accumulated
depreciation.
 Market Value: Market value is the current price at which anyone can sell an asset.
 Contra asset account: An account offset against an asset account on the balance sheet.
Accumulated Depreciation.
 Contra revenue account: An account offset against a revenue account on the income
statement.
 Amortization: The allocation of the cost of an intangible asset to expense over its useful life in
a systematic and useful manner.

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 Depletion: The allocation of the cost of a natural resource to expense in a rational and
systematic manner over the resource’s useful life.
 Capital Expenditure: Expenditures that increase the company’s investment in productive
facilities.
 Revenue Expenditure: Expenditure that are immediately charged against revenues as an
expense.
 Salvage Value: An estimate of an asset’s value at the end of its useful life.
 Goodwill: The value of all favorable attributes that related to a business enterprise.
 Useful life: An estimate of the expected productive life also called service life of an asset.
 Financial Statements: Financial statements are the combination of some report which is
prepared to ascertain the profit or loss of the business, and to know the financial position of the
company. Such as: Statement of Comprehensive income, Statement of change in equity,
Statement of Cash flow, Statement of Financial Position.
 Ratio Analysis: Ratio analysis is a medium to understand the financial weakness and
soundness of an organization.
 Liquidity Ratio: Those ratios are calculated to judge the short term capabilities of paying
current liabilities is called the liquidity ratio.
No. Ratio Principal Standard

1 Current Assets
Current Ratio = 2:1
Current Liabilities

Liquid Assets 1:1

2 Liquid /Acid test/ Quick Ratio=
Current Liabilities

Working Capital 1:1

3 Working Capital Ratio=
Current Liabilities

 Activity Ratio: Those ratios are measures the effectiveness of the invested property of an
organization is called the Activity ratio.

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 No. Ratio Principal Standard

1 Net Credit Sales

Debtor Turnover Ratio = 8 times
Average Debtor

Cost of goods sold 8 times

2 Inventory turnover Ratio =
Average Inventory

Net sales
3 Asset Turnover Ratio=
Average Assets

 Profitability Ratio: Those ratios are measures the earning capabilities of an organization are
called the profitability ratio.
No. Ratio Principal
Standard

1 Total Profit
Gross Profit Ratio = × 100
Net Sales

Net Profit
2 Net Proft Ratio = ×100
Net sales

Net Profit
3 Return on Assets =
Average Assets

Net Profit
4 Return on Equity =
Average Owner’s Equity

Net Profit – Dividend for preference shareholder

5 Earning Per Share =
Number of Share are distributed

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 Solvency Ratio: Those ratios are measures the capabilities of paying debt or liabilities are
called Solvency ratio.
No. Ratio Principal Standard

1 External Liability
Debtor To Assets Ratio =
Total Assets

External Liability
2 Debt to Equity Ratio =
Owner’s Equity

 Cost Accounting: A branch of accounting that provides information to help the management
of a firm to evaluate production cost and efficiency.
 Cost Sheet: A cost sheet is a report on which is accumulated all of the costs associated with a
product or production job.
 Cost Control: Cost control is the practice of identifying and reducing business expenses to
increase profits, and it starts with the budgeting process. A business owner compares actual
results to the budget expectations, and if actual costs are higher than planned, management
takes action.
 Cost Control Techniques: Costs can be controlling by employing the following methods: 1)
Material Control 2) Labor Control 3) Overheads Control 4)Standard costing
 Cost Reduction: The process of looking for, finding and removing unwarranted expenses
from a business to increase profits without having a negative impact on product quality.
 Cost Center: Cost center refers to a particular area of activity and there may be multiple cost
centers in an organization. Every cost center adds some cost to the product and every cost
center is responsible for all its activity and cost. A cost center may also be called a department
or a sub-department. There are three types of cost centers: 1) Personal and Impersonal Cost
Centers 2) Operation and Process Cost Centers 3) Product and Service Cost Centers.
 Profit Center: Profit centers are inclusive of cost centers as well as revenue activities. Profit
centers adopt policies to achieve such targets.
 Cost Drivers: A factor that can cause a change in the cost of an activity.

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 Conversion Cost: The cost required to convert raw material into product is called as
conversion cost. It includes labor, direct expenses, and overhead.
 Carrying Cost: Carrying cost represents the cost to maintain inventory, lock up cost of
inventory, store rent, and store operation expenses.
 Out of Stock Cost: Sometimes loss is incurred due to shortage of stock such as loss in sale,
loss of goodwill of a business or idle machine. It is called out of stock cost.
 Management Accounting:
 Contribution Margin: Contribution margin is the difference between sale price and variable
cost.
 Ordering Costs: Ordering costs represent the cost to place an order, up to to stage until the
material is included as inventory.
 Development Cost: To develop new product, improve existing product, and improved
method in producing a product called development cost.
 Policy Cost: The cost incurred to implement a new policy in addition to regular policy is
called policy cost.
 Manufacturing Cost: Manufacturing cost is sum of direct Martials, direct labors and
overhead cost.
 Direct & Indirect Materials: The materials directly contributed to a product and those easily
identifiable in the finished product are called direct materials. For example, paper in books,
wood in furniture. They are also known as high-value items. On the other hand lower cost
items or supporting material used in the production of any finished product are called indirect
material. For example, nails in shoes or furniture.
 Direct Labor: Any wages relate to conversion of raw material into finished goods are called
direct labor.
 Overheads: Indirect expenses are called overheads, which include material and labor.
Overheads are classified as: Production or manufacturing overheads 2) Administrative
expenses 3) Selling Expenses 4) Distribution expenses 5) Research and development
expenses.
 Opportunity Cost: The potential benefit that is given up when one alternative is selected over
another.

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 Sunk Cost: A cost that has already been incurred and that cannot be changed by any decision
made now or in the future.
 Break Even point: The level of seals which the profit is zero.
 Margin of Safety: Excess of sale at Break Even Point is known as margin of safety.
 Effectiveness: Effectiveness is about doing the right task, completing activities and achieving
goals.
 Efficiency: Efficiency is about doing the things in an optimal way. Like as fastest or in the
less expensive way.
 Benchmarking: Benchmarking is the process of measuring the performance of company’s
product, and services against those of another business considered to be the best in the
industry.
 Inflation: The situation where the perching power of money is decreasing and the price of the
daily commodities is increasing is called inflation.
 Budget: A budget is a financial plan for a defined period of time. An estimate of costs,
revenues, and resources over a specified period, reflecting a reading of future financial
conditions and goals. Budgeting is the process of creating a plan to spend your money.
 Balanced Budget: Where the revenues and expenses are equal and inflation of the country are
under control is called the revenue budget.
 Surplus Budget: Where the revenues are more than expenses that is called the surplus
budget.
 Deficit Budget: Where the expenses are more than revenues that is called the deficit budget.
 Master Budget: The budget which covers all the information in a summarized manner is
called master budget. This budget is very useful for the top management of the company.
 Cash Budget: A cash budget is an estimation of the cash inflows and outflows for a business
over a specific period of time.
 Government Budget: A government budget is an annual financial statement presenting the
government's proposed revenues and spending for a financial year that is often passed by the
legislature, approved by the chief executive or president and presented by the Finance
Minister to the nation.

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 GDP: An estimate value of the total worth of a country’s production and services with its
boundary by its national and foreigners over the period of one year is called GDP.
 GNP: An estimate value of the total worth of a country’s production and services, by citizens
of a country or its land or foreign land over the period of one year is called GNP.
 JIT: A production and inventory control system in which Materials are purchased and units
are only as needed to meet actual customer demand.
 Value Chain: the major business functions that add value to a company’s products and
services such as research and development, product design, manufacturing, marketing,
distribution and customer service.
 Joint product: Two or more products that are produced form a common input.
 Joint Cost: Cost that are incurred up to the split-off point in a process that produced joint
product.
 Finance: According to Khan and Jain, “Finance is the art and science of managing money”.
 Business finance: “Business finance is that business activity which concerns with the
acquisition and conversation of capital funds in meeting financial needs and overall objectives
of a business enterprise”.
 Financial management: Financial Management deals with procurement of funds and their
effective utilization in the business”.
 Types of finance: 1) Private Finance, which includes the Individual, Firms, Business or
Corporate Financial activities to meet the requirements. 2) Public Finance which concerns
with revenue and disbursement of Government such as Central Government, State
Government and Semi-Government Financial matters.
 Objectives of Financial Management: 1) Profit maximization 2) Wealth maximization.
 Optimum capital structure: Optimum capital structure may be defined as the capital
structure or combination of debt and equity that leads to the maximum value of the firm.
 Objectives of Capital Structure: 1) Maximize the value of the firm. 2) Minimize the overall
cost of capital.
 Factors are considered while deciding the capital structure: 1) Leverage 2) Cost of Capital
3) Government policy

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 Cost of capital: Cost of capital is the rate of return the firm required from investment in order
to increase the value of the firm in the market place”.
 Audit: Audit is the independent opinion about the books of account of an organization.
 Auditing: Auditing is the process by which a competent, independent person accumulates
and evaluates evidence about quantifiable information related to a specific economic entity for
the purpose of determining and reporting on the degree of correspondence between
quantifiable information and established criteria.
 Assurance: Assurance means proper auditing and reporting. Auditing, it will assure to the
interested user, the auditing policy is proper.
 Audit Methodology: Audit Methodology is a particular set of process or procedures used to
assess a company’s financial and business risk.

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